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Federal Register / Vol. 86, No. 2 / Tuesday, January 5, 2021 / Rules and Regulations
Commission explained that daily average AANA would provide a more comprehensive assessment of an FEUs participation in the swaps market in determining whether the FEU has MSE
and would address the possibility of window dressing of exposures by market participants that might seek to avoid the CFTCs margin requirements.52
In its Report, the GMAC
subcommittee stated that the use of daily average AANA for the calculation AANA entailed more work for smaller counterparties and that such method of calculation was only used in the United States, noting that in the United States, daily AANA averaging over the threemonth calculation period for Phase 5 53
required 64 observations while global determinations based on month-end AANA required only three observations.54 The Report further stated that month-end AANA averaging over the three-month calculation period, by accounting for three periodic dates on which AANA would be calculated, would mitigate the risk that market participants would adjust exposures to avoid the CFTCs margin requirements, and that it would be neither practicable nor financially desirable for parties to tear-up their positions on a recurring basis prior to each month-end AANA
calculation, as it would interfere with their hedging strategies and cause them to incur realized profit and loss.55
The Commission notes that the adoption of a month-end AANA
methodology for the calculation of AANA to determine MSE will align the CFTCs approach with the BCBS/IOSCO
Framework and the approach adopted by other major market jurisdictions. The Commission does acknowledge that such methodology for calculating AANA could raise the risk that market participants that are counterparties to CSEs may window dress their exposures by adjusting their exposures as they approach the month-end date.
By doing so, an FEU would no longer have to post and collect IM with all CSEs for all its uncleared swaps for at least twelve months from the date on which compliance with the IM
52 See
supra note 21.
used in the Margin Subcommittee Report, Phase 5 meant the phase of compliance with the CFTCs IM requirements that started on September 1, 2020, comprising covered swap entities and covered counterparties with AANA between $750
billion and $50 billion. Since the issuance of the Report, the IM compliance schedule has been revised to defer the beginning of Phase 5 to September 1, 2021. See 17 CFR 23.161a6.
54 Margin Subcommittee Report at 52.
55 Id.

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requirements would have been initially required.56
To address this concern, the Commission has determined to revise the proposed rule text to include antievasion language prohibiting activities not carried out in the ordinary course of business and willfully designed to circumvent the month-end AANA
calculation by, for example, altering swap book composition to evade meeting the definition of MSE and thus coming within the scope of the CFTCs IM requirements. In addition, the Commission points to the availability of other tools to address the risk of window dressing. Regulation 23.402aii requires CSEs to have written policies and procedures to prevent their evasion, or participation in or facilitation of an evasion, of any provision of the CEA or the Commissions regulations.57 Also, section 4b of the CEA prohibits any person entering into a swap with another person from cheating or defrauding or willfully deceiving or attempting to deceive the other person.58
The Commission further notes that replacing daily average AANA with month-end AANA for determining MSE
could result in an AANA calculation that is not fully representative of an entitys participation in the swaps markets. Under the current definition of MSE, AANA must be calculated counting uncleared swaps, uncleared security-based swaps, foreign exchange forwards, or foreign exchange swaps.
Under the Final Rule, which provides for the calculation of AANA by averaging month-end AANA during the three-month calculation period, some of the financial products that are required to be included in the calculation, because of their terms, such as tenure and time of execution, may be undercounted or excluded.59
The Commission believes that the notional amount associated with products that may be excluded from the AANA calculation, as a result of the change to month-end AANA averaging for the calculation of AANA, may be relatively low and that the products contribution to the AANA calculation for the purpose of determining MSE

may be insignificant. In this regard, in an analysis undertaken by the Commissions Office of the Chief Economist OCE on a sample of days, the OCE estimated setting aside the window dressing issue that calculations based on end-of-month AANA would yield fairly similar results as calculations based on the current daily average AANA approach. Based on 2020 swap data, the OCE estimated that 492 entities of the 514 entities that would have come into scope in the last phase of the IM compliance schedule with AANA between $8 and $50
billion based on the current daily AANA calculation methodology would also come into scope under the monthend AANA calculation methodology being adopted herein. Put differently, all but 22 of the entities that would be above MSE under the existing methodology would also be above MSE
under the month-end AANA
methodology. In addition, there are 20
entities that would be in scope under the month-end AANA methodology, but would not be in scope under the existing methodology, so that the aggregate number of entities under the two methodologies differs only by two.
In the aggregate, the two methodologies capture quite similar sets of entities. In addition, the entities that fall out of scope applying the monthend AANA methodology tend to be among the smallest coming into IM
compliance in the last phase of compliance. That is, entities that would have been in-scope under the current daily average AANA methodology but not the month-end AANA methodology average $6.95 billion in AANA, compared to $20 billion for all entities coming into scope in the last phase of compliance.60
Based on the OCE analysis discussed above, in the Commissions view, switching from daily average AANA to month-end AANA for the purpose of determining MSE would likely have a limited impact on the protections provided by the CFTC Margin Rule. In addition, the Commission believes that the anti-evasion language being incorporated into the rule text by this Final Rule mitigates the window dressing concerns.61

56 Under the Final Rule, the MSE calculation will be made annually on September 1 of each year and will be in effect for the next twelve months after that date.
57 17 CFR 23.402aii.
58 7 U.S.C. 6b.
59 For example, the Commission observes that certain physical commodity swaps, such as electricity and natural gas swaps, are products for which a month-end AANA calculation might not provide a comprehensive assessment of the full scope of an FEUs exposure to those products.

60 Note that the OCE calculation excludes commodity swaps, and the examples of products that end-of-month calculations may undercount tend to be commodity swaps, such as natural gas and electricity swaps. Overall, commodity swaps tend to represent less than 1% of all swap trades.
See BIS Statistic Explorer, Global OTC derivatives market July 30, 2020, https stats.bis.org/statx/
srs/table/d5.1?f=pdf.
61 The prudential regulators have not indicated whether they intend to amend their margin requirements consistent with the BCBS/IOSCO

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